Ellison: 'We can double Oracle's hardware biz'

Larry Ellison, Oracle's chief executive officer and cofounder, ain't messing around with systems. In fact, he is playing doubles with tennis partner and now Oracle co-president, Mark Hurd. Ellison will handle the creation of so-called "engineered systems," which stack up Oracle hardware and software, and Hurd will peddle them and make sure support works well.

The conference call with Wall Street analysts today to talk about Oracle's first quarter of fiscal 2011 was not just a coming-out party for Hurd, who was ousted from the top job at HP last month. The call was dominated by Ellison, who not only talked about how Oracle was committed to hardware, but also about how it could get very high gross margins on engineered systems, and double-up sales of hardware because of the combination of Oracle soft and Sun hard wares.

"We are profitable and we are going to get more so as the year goes on," Ellison said in the call, referring to the Sun hardware biz, which he conceded caused some customers and investors concern. He said that Oracle had set an internal goal to get gross margins for the Sun products to 50 per cent this year, and in the first quarter they hit 48.4 per cent, up from 46 per cent in the prior quarter. And he thinks that while it may take some time, Oracle can get those hardware gross margins up as high as 60 per cent, which Ellison said was "absolutely reasonable," adding that "Once profitable, we need to grow it and we think we can double it. We have to grow it and take share from IBM and other competitors."

Ellison is taking heart from the Exadata V2 data warehousing and online transaction processing appliance, which he said now has a $1.5bn pipeline for fiscal 2011. He also bragged that at Softbank, Teradata's largest customer in Japan, Oracle won a deal to replace 60 racks of Teradata gear with three racks of Exadata gear, which he said provided better performance and which had revenues that were split half-and-half on the hardware/software divide.

The rebounding database and application software business and the addition of hardware and support revenues from Sun Microsystems combined to jack up Oracle's revenues by 48 per cent to $7.5bn for its first quarter of fiscal 2011. In the quarter ended August 31, the software giant with big server aspirations was able to bring $1.35bn to the bottom line, up 18 per cent from the year-ago quarter, which did not include Sun's products.

In the quarter, Oracle said that new software license sales rose by 25 per cent to $1.29bn, with sales of software-license updates and product support for Oracle's database, middleware, and application software rising by only 11 per cent to $3.45bn. Total software revenues rose by 14 per cent in fiscal Q1 to $4.74bn.

New license sales for database and middleware products jumped 32 per cent to $937m, with support and updates from these products raking in $2.32bn, up 12 per cent. New license sales for application software rose 10 per cent, to $349m, and updates and support for apps brought in another $1.13bn, up 8 per cent.

On the systems front, Oracle's hardware systems revenues came in at $1.08bn, and there is no compare because Oracle did not own Sun Microsystems in the year-ago quarter. Hardware systems support, which includes fees for tech support and maintenance on Sparc and x64 servers as well as various storage and networking products, came to $619m in the quarter. Looking at it sequentially from the fourth quarter of fiscal 2010, which ended in May, system-hardware sales have fallen 12.5 per cent (from $1.23bn), but system-support sales are up 3.5 per cent (from $598m). Oracle spent $557m in operating expenses supporting the Sun hardware biz, leaving $522m to help pay the rest of the Oracle bills with gross margins; the Sun support business had $301m in expenses, which left over $318m in gross margins.

Sun's fair share of sales, marketing, research, development, interest payments, and other overhead is no doubt large, and Oracle has not said how much net income, if any, that Sun is contributing. But in the call with Wall Street, Ellison said Oracle was confident that it could extract $1.5bn in operating profits out of Sun this fiscal year and $2bn next fiscal year.

Like other Unix server makers, Oracle has been hit by transitions and a hesitancy to invest in midrange and big iron boxes until all the new processors are in the field. Oracle has not yet announced a new partnership with Fujitsu covering the Sparc Enterprise M machines, which are based on Fujitsu's Sparc64-VII+ processors and server designs, and it has not got its Sparc T3 systems, which use Oracle's 16-core "Rainbow Falls" processors, out the door yet, either. These Sparc T3 machines were due around the middle of this year, and could be announced at Oracle's OpenWorld extravaganza next week.

In a statement accompanying the financial results, Hurd, the newly appointed co-president at Oracle alongside Safra Catz, said that the company would be announcing two new high-end systems that combine Sun hardware and Oracle software at the OpenWorld customer event in Silicon Valley, which starts on Sunday.

Hurd also bragged that Oracle had more than $4bn in research and development earmarked for fiscal 2011, which would only make Oracle's "robust product portfolio" stronger. In the twelve months through September 2009 (the last financials we ever got out of the Unix server company), Sun spent $1.6bn on R&D all by itself — and it looks like Oracle has not slashed Sun's portion of the R&D by all that much. The combined company's R&D investment in fiscal Q1 is running at 15 per cent of revenues, which is a point higher than Sun was doing by itself in its final year of biz. Sun had already done most of the slashing by the time Oracle was moving in for the kill.

"Oracle has amassed the most enviable portfolio of technologies in the industry," Hurd said in his opening statement as a president at his new company, and he sounded like he had been working there for years. "I don't believe there is any company that is better positioned than Oracle," he effused.

Hurd chimed in when Ellison was explaining that Oracle was not going to emulate IBM and HP, building up a huge services business, but rather it would build up an integrated systems business with differentiated features, tight integration, and lower support costs. "We look at it just reverse," Ellison said. "We look at products being central and obviating the need for services." And then Ellison deferred to Hurd, saying he knew more about this, to which Hurd added that Oracle could "build something once and sell it many, many times."

"We want to grow, and we want to grow profitably," Hurd said later in the call. "That's my priority. We want to have the best sales force on the planet, and offer the best support. And that's what I am working on."

Looking ahead, Catz said that Oracle expected the Sun hardware business to hit somewhere between $1bn and $1.1bn in sales in the second fiscal quarter ended in November, with Oracle as a whole growing somewhere between 43 and 48 per cent. Those numbers have an easy compare, just like the current quarter did, in that Sun was not a part of Oracle in fiscal 2010's Q2. But if, as Ellison says, Oracle can double up the Sun hardware business over the next couple of years, he will have restored Sun to a reasonable level of sales — something akin to Sun's sales levels in 2005. That might not be the dot-com boom, but it sure beats going bust. ®